When is an offer to purchase shares a defence to an unfair prejudice claim
The recent Court of Appeal case of Re: Sprintroom Ltd Prescott v Potamianos and anor has provided further insight into how the Court will determine whether an offer to purchase a minority shareholders’ shares is reasonable.
A shareholder can make a petition to the court under s994 of the Companies Act 2006 if they believe the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of all or some of the shareholders (including at least the applicant).
This is regularly used by minority shareholders, in order to obtain relief from the court, when they have suffered unfair prejudicial conduct from majority shareholders. If the Court is satisfied that there has been unfair prejudicial conduct, the court may make an order to give relief such as an order for the majority shareholder/s to purchase the minority shareholder’s shares, at a value as determined by the court, to ensure that a fair value is received.
In this case a minority shareholder made a petition to the Court because he had been removed as a director of the company, by a majority shareholder, who had called for his removal, and the minority shareholder’s service company were no longer receiving payment. The majority shareholder had sought to exclude the minority shareholder from the management of the company as he believed the minority shareholder had breached his fiduciary duty in relation to intellectual property rights of software created by the minority shareholder.
On appeal, the Court upheld that whilst the minority shareholder had acted in breach of his fiduciary duty to the company, in relation to separate IP rights claim, the breach was not conduct which provided a fair justification to exclude him from management. The minority shareholder sought an order for the majority shareholder to purchase his shares, and have the value be determined by the Court.
The majority shareholder, in this case, had made offers to the minority shareholder to purchase his shares at an earlier stage, which he had refused. The Court was asked to determine whether the offers made by the majority shareholder, and the rejection of them by the minority shareholder, was reasonable. This is important as the conduct of the minority shareholder in relation the offers can be considered by the Court when deciding whether to allow the petition for unfair prejudicial conduct.
The Court confirmed that the reasonableness of an offer was fact specific. There is no exhaustive list of requirements for reasonableness; however, the Court provided further guidance on what factors are likely to be relevant when considering reasonableness of an offer in these circumstances.
The Court stated that the value offered, the likelihood of the majority shareholder being able to implement the offer made and the proximity of the offer to the unfair conduct would be considered. In this case, whilst some of the offers were reasonable it was not enough to justify the minority shareholders exclusion from management.
Whether you are a minority or majority shareholder, it is important to consider the impact of the actions you are taking. A minority shareholder who has suffered due to conduct of the majority has recourse to pursue relief from the court. A majority shareholder, who is having a dispute with a minority shareholder, should be cautious if offering to purchase the shares that (i) the value is fair, (ii) the calculation of the offer has been provided, and (iii) that they have the capability of executing the offer.
If you have any questions in relation to a shareholder dispute affecting your company or would like advice on a dispute generally, please do not hesitate to contact Simon Beasley in our dispute resolution team on 0207 288 4769 or email firstname.lastname@example.org.